One pound of inference, no more, no less. No humbug, no cant, but only inference. This task done, and he would go free.

Wednesday, January 26, 2011

Make Child Tax Rebates A Percentage of Income

If I had to nominate a fact in the 'most significant under-appreciated truth about western society', it's that western societies have ridiculously low birth rates by historical standards. The United States has 2.06 births per woman, just under the replacement level of around 2.1. Australia is 1.78. Italy is 1.32. Singapore is 1.1. As Mark Steyn is fond of pointing out, this has huge potential consequences. Social security is a Ponzi scheme that only works in a growing population, so lots of workers support each retiree. It collapses when you have negative population growth, and more retirees than workers.As most first world countries are rapidly finding out. The alternative is mass immigration, which is fine as long as you're willing to accept that your country at the end will probably look completely different in many cultural respects from how it started. If you're a self-loathing leftist who sees nothing but greed and oppression in the history of the west, this is a big plus. If you have half a brain in your head, it is not.

Another alternative is of course eliminating these programs, which I'm fully on board with, but try selling that at the Iowa caucuses and watch the AARP vote stampede towards your opponents.

For one reason or another, most educated people in the first world don't seem to want to have kids. While kids may have negative externalities when you're on an airplane, they probably have positive externalities in the medium term. Like any good economist, we want to incentivise people to have more kids.

And here's where current policy gets tricky. Most tax credits are in lump sum forms, or tax rebates that phase out at higher incomes. The US gives you $1000 per dependent child. The Australian government gives you a lump sum 'baby bonus' of $5294 when you have a kid.

Here's the problem. It costs hundreds of thousands of dollars to raise a kid. Who is actually going to be incentivised to have a kid by the promise of five grand?

Idiots, that's who. Absolute drooling innumerate fools who can't figure out that this is a drop in the ocean relative to what that kid will cost them. Morons with ridiculous hyperbolic discount rates fuelled by their crack habits. Or (more likely) people who will collect the 5 grand, but weren't planning on paying for the kid anyway as they live on welfare.

Now, you don't have to be a genetic determinist to have misgivings about this scheme. A relatively larger proportion of the children in the country will now be raised in households where the parents thought it was a great idea to have a kid for the princely amount of five grand. If you're confident in the ability of Australia's robust public schools to undo this kind of home-instilled stupidity, then it's no problem. I also suggest you probably haven't had much exposure to Australia's public schools.

If I were designing a scheme, I'd make each child generate a tax credit equal to $2000 or 2% of income, whichever is larger. That way the middle class and the rich are encouraged to have children as well. It also reflects the fact that like it or not, rich parents will spend more on their children, and so you have to offer more dollars to incentivise them to have kids. While 2% may sound like a lot, I doubt people are going to start popping out 10 kids to save 20% on taxes. Although if they did, those kids would be being brought in a family that really hated taxes, which is fine by me too. Either way, the future is looking brighter.